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CEAMeS Discussion Paper No. 6 / 2017
On the (non-)sustainability of China’s development strategies
DOI: 10.2139/ssrn.2946768
On the (non-)sustainability of China’s development strategies
1Helmut Wagner2
Abstract. This paper summarizes the main characteristics of the two major Chinese growth strategies since 1978, namely the Deng strategy (named after Deng Xiaoping) between 1978 and 2011 and the Xi strategy (named after Xi Jinping) since 2012/13. After a brief description of both strategies, I analyze in depth whether the respective reforms of the two strategies have caused sustainable or unsustainable growth and economic development. Furthermore, I derive some implications concerning the danger of a Chinese middle-income trap and pro- pose some policy recommendations (also against the background of the Korean experience).
I finally develop a growth-theoretic systematization of the arguments elaborated previously.
Keywords: China, sustainability, economic development, rebalancing JEL Classification: F41, O10, O40, O53
1 I would like to thank Linda Glawe and Denis Stijepic for comments and Ms. Glawe also for valuable research assistance, in particular with regard to collecting empirical data and references.
2 University of Hagen, Faculty of Economics, Chair of Macroeconomics, 58084 Hagen, Germany, phone +4923319872640, fax +492331987391, e-mail helmut.wagner@fernuni-hagen.de
1 Introduction
In this paper I ask whether China’s development strategies since 1978 have been and/or will be sustainable. I formulate and examine 11 hypotheses regarding this question:
1. There have been (at least) two development strategies in China since 1978/1990, which I call the “Deng strategy” (starting in 1978) and the “Xi strategy” (starting in 2011).
2. The Deng strategy was characterized by (i) stepwise regional development of the country (starting by developing the eastern while neglecting the western parts of China); (ii) prioritization of economic growth maximization (aiming for quick econom- ic convergence to the Western frontier countries, like the US, while “neglecting” the effects on the social and ecological environment in China’s boom regions); (iii) an ex- port-led, industry/manufacturing-supporting growth path; and (iv) political “decen- tralization.”
3. Since the mid-2000s the Deng strategy has been labeled as “unsustainable.”
4. The hypothesis of the unsustainability of the Deng strategy was argumentatively well founded, albeit not empirically tested.
5. In contrast to the Deng strategy, the Xi strategy is characterized by the attempt to
“rebalance” the whole system, specifically by (i) the attempt to integrate the western regions of China into the development strategy; (ii) the emphasis on improving the social and ecological standards within China; (iii) redirecting the economy towards a consumption- and service-led growth path; and (iv) the attempt to (re)stabilize the society by re-authorizing the political system (refocusing on central control).
6. It is uncertain whether the Xi strategy is or will be sustainable.
7. There is a danger for the Xi strategy of becoming stuck in a so-called “middle-income trap” (MIT). (Here the question of whether China is already in or even beyond the middle-income range (MIR) can be seen as being unsettled.)
8. There are conditions (political and institutional reforms) that need to be implement- ed so that the Xi strategy is or can become sustainable and thus avoid or overcome an MIT.
9. Development can best be explained as a stepwise process with thresholds to over- come and structural change as a sequential, step-by-step (nonlinear) reform process.
This means that development/growth strategies are (or have to be)
changed/reformed from time to time to avoid endangering the stability (and hence the sustainability) of a social (economic and political) system.
10. A developing (emerging market) country that does not initiate the necessary struc- tural reforms on time will be caught in a development (middle-income) trap.
11. China can learn from successful countries, such as South Korea, how to avoid an MIT and hence implement a successful development strategy, though the framework conditions for China are different today.
We examine these hypotheses successively while dividing the paper into five sections. Sec- tion 2 deals with the so-called Deng strategy, which arguably lasted from 1978 to 2011. It describes this strategy and then discusses whether it was unsustainable, which is a common view. Section 3 presents the new strategy after 2011 (beginning with or even before the start of the presidency of Xi Jinping in 2012/13), which here is called the Xi strategy, and asks whether this strategy will be sustainable. It tries to identify the decisive factors or precondi- tions for the sustainability of the new strategy and highlights the pitfalls. After Section 4 gives a brief growth-theoretic systematization of the previous arguments, Section 5 asks what China can learn from successful countries, such as South Korea, to avoid an MIT and hence implement a successful development strategy. Section 6 concludes. Appendix A de- velops the core of a theory of instability tendencies in a socialist market economy. In Appen- dix B I sketch the basic idea of how development evolves and structural change takes place over time. This deepens the theoretical background for the interpretation of the growth strategy change in China outlined in the main part of the paper.
2 The Deng strategy and the doubts about its sustainability
2.1 The Deng strategy and its content
The Deng strategy has been characterized by (i) stepwise regional development of the coun- try, starting with the development of the eastern (while neglecting the development of the western) part of China; (ii) prioritization of the goal of maximizing economic growth (aiming for quick economic convergence with the advanced frontier countries, like the US or Japan, while “neglecting” the effects on the social and ecological environment in China’s boom re- gions); (iii) an export-led, industry/manufacturing-supporting growth path; and (iv) political
“decentralization,” that is, a partial shift of power from the central to the local governments in the regions.
(i) Stepwise development
Such stepwise development has been regarded as being (and probably was) “without alter- native/the only way,” since China did not have enough capital to develop such a huge coun- try quickly as a whole.3 Moreover, as a result, China could raise its economic growth rate by profiting from the huge migration flow from the west to the east (see Section 4 for a growth- theoretic explanation).
Table 1 compares China’s resources around 1980 with those in the United States in the same year.
3 See also Wei et al. (2017: 53), who emphasize that “public funding for infrastructure was limited, especially in the early days of the reform era.” Therefore, efforts were concentrated on special economic zones and special development zones in the coastal provinces. Moreover, “policy reforms within these zones were politically easier than doing the same things on a national scale.”
Table 1 Resources in China and in the United States in 1980 Capital stock
(mill. US$)
Land area
(sq. km)
Population
(thousands)
Human capital
(index)
GDP p.c.
(const. 2010 US$)
China 2,783,241 9,388,250 981,235 1.68 347.9
US 22,033,662 9,158,960 227,225 3.35 28,734.4
Data Source: Capital stock (at constant national prices in mill. 2011 US$) and human capital:
PWT 9; land area, population and per capita GDP: World Bank (2017).
(ii) Prioritization of economic growth
The alternatives to the prioritization of economic growth would probably have been more risky or more conflictual as the population of China strived to improve the economic living standards. It definitely would have reduced the speed of (economic) convergence over the past decades. Moreover, it is necessary to take into account that, according to the German author Berthold Brecht’s statement: “Food comes first, then the morals”4; that is, economic preferences dominate in the beginning or at an early stage of development, leading to tran- sitory sectoral imbalances (cf. Engel 1857, Kongsamut et al. 2001).5
Moreover, by following a higher growth or quick convergence strategy, the Chinese Gov- ernment could calm down potential social tensions (particularly after the Tiananmen Square events in 1989). Here it was helpful that the Communist Government had enough power to steer the strategy course even against potential resistance. A mighty communist govern- ment could even be (and perhaps was) regarded as a kind of powerful and assertive “com- mon-wealth maximizer” – according to the artificial figure that has prominently been used for characterizing policy makers in Keynesian policy models.
All in all, this meant that the priority had to be given to developing the economic system before focusing on other subsystems (the social and the ecological system) in China.6 This reflects the so-called “environmental Kuznets curve” – a stylized fact that describes envi- ronmental damage increasing in the early stages of development and reducing in later stages (see Dasgupta et al. 2002).
(iii) Focus on exports and manufacturing
This growth strategy, mainly focusing on exports and manufacturing, was consistent with (and obviously was the right choice for) China’s aspiration to develop fast, as there was a need in China for technical knowledge and know-how that was too expensive for it to buy on the market; therefore, there was a need to open up and invite foreign companies and simul-
4 Translated from the German “Erst kommt das Fressen, dann die Moral.” Brecht and Lucchesi (2005).
5 At the heart of this statement is the so-called “Engel’s Law.” This “Law” states that the richer a household becomes, the less it desires to spend on food. Kongsamut et al. (2001) extend Engel’s Law by arguing that the (average) household then desires to spend more on services, whereas Brecht argues that it then places more emphasis on morals (social values), which can be understood as a kind of non-economic service.
6 As Naughton (2017: 20) notes: “In China, as in other East Asian societies after World War II, there has almost certainly been a profound social and political consensus in favor of growth.”
taneously to offer China as part of a world-wide production chain.7 Accordingly, China could become the “workbench” of the world. In particular, China could attract FDI to squeeze out know-how and training (on the job) from foreign companies. Actually, the Chinese Govern- ment forced foreign companies into “joint ventures.” This approach was very promising and successful for a fast and cheap type of acquisition of know-how insofar as it enabled China quickly to narrow the technology gap with the Western frontier countries. Of course, this was only possible because of the huge market size of China, which was attractive to foreign investors; it would not have been possible or promising for smaller countries (based on a cost–benefit analysis of FDI investors particularly looking for huge markets, whereas smaller countries and markets are less attractive to foreign investors due to the need to give away technological know-how).8
(iv) Political decentralization
After 1978 China followed a gradual, experimental reform approach for three decades, known as “crossing the river by groping for stones” (Deng Xiaoping). This approach was as- sociated with political decentralization (the governance literature in political science some- times speaks of a decrease in states’ capacity for hierarchical steering; this is also in line with an increase in the need for the cooperative state).9 This kind of political decentralization (together with accepting social differentiation and elements of market economy self- regulation) apparently had been highly beneficial for triggering the growth dynamics in the past decades.10 Deng’s policy strategy is a good demonstration of both the potential and the challenges involved in experimenting with new rules. In the late medieval age, China was the world’s leader in technology, but, in the nineteenth century, the country turned inward and missed the new economic dynamism that new technologies helped to foster in the period of the Industrial Revolution. Only under Deng Xiaoping did China open up its economy and begin to experiment with new sets of rules. First special zones were created following the example of Hong Kong under the British Colonial Government, with which China created the opportunity for investors to experiment under market rules, realize economic incentives and unfurl technologies, albeit in a controlled setting. These (originally) four economic zones and fourteen cities, designated as special areas for economic experimentation, paved the way for a nationwide consensus on moving to a more market-orientated economy.
7 Theoretically, China also had the alternative option to follow Japan’s example and just learn from the knowledge (blueprint) incorporated into imported high-end products (for the theoretical foundation, see the new growth theory, e.g., Coe and Helpman 1995, Falvey et al. 2002). However, this technologically more ambi- tious alternative may have been too risky for China, as, in contrast to Japan, China was still at a lower techno- logical level (i.e. it lacked experienced engineers capable of successfully implementing this “blueprint” detec- tion method).
8 See in this context Krugman (1989) and Young (1991).
9 “Deng built a system of tacit norms by which senior leaders were limited to two terms in office, members of the Politburo Standing Committee divided leadership roles among themselves, and the senior leader made decisions in consultation with other leaders and retired elders” (Nathan 2016).
10 Of course, it is not possible to prove this, as the counterfactual cannot be tested, that is, history cannot be turned back (there is no time turner as in Harry Potter stories).
2.2 On the (un)sustainability of the Deng strategy
Since the mid-2000s the Deng strategy has been labeled as “unsustainable.” To my knowledge, this characterization was first made by Western scholars and international or- ganizations, such as the IMF and the OECD, and was adopted soon afterwards by Chinese scholars and politicians as well.
Hence, Chinese politicians, such as Premier Minister Wen Jiabao, warned early (in 2007) that the growth of the Chinese economy would be “unstable, unbalanced, uncoordinated and unsustainable.”11
Since the mid-2000s a growing body of literature has referred to increasing imbalances within China and the need for rebalancing (e.g. Blanchard and Giavazzi 2005, Aziz 2006, Aziz and Cui 2007, Prasad 2009, Zhu and Wan 2012). It has been claimed that China’s economic growth in the past decades has primarily relied on (too) high savings, (too) high investment and (too) high exports. A comprehensive list of imbalances (including uneven growth across provinces, skill levels and sectors, weakened safety nets, misallocation of investment and growing macroeconomic imbalances)12 is provided by Blanchard and Giavazzi (2005).13 The authors argue that these imbalances had already emerged at the beginning of the 2000s along with the exceptional (but unsustainable) growth that China had already experienced in the two previous decades. (See Appendix A for a more formal description of the example of ever-increasing macroeconomic imbalances.)
The question remains of whether unsustainability was then seen as being endogenously driven or dependent on exogenous factors.14 The state of “sustainability” can be described as the result of the interaction of several subsystems of a society, namely the economic, po- litical, socio-cultural and ecological subsystems, as analyzed in more detail in Appendix B of this paper.
Until now the IMF has characterized China as having “reached an inflection point, where continuing with the old-growth model will likely either drag the economy into the middle- income trap or trigger a financial crisis” (see Zhang 2016: 3).
Using the above-chosen structural characteristics of the Deng strategy permits a better structuring of the discussion.
11In addition, Premier Minister Li Keqiangrecently (2016) stated that“(t)he new normal means … a farewell to the unbalanced, uncoordinated and unsustainable growth model,” though the IMF argues in its recent country report (2016) that this “transition is proving difficult and bumpy” (IMF 2016: 4).
12 As already mentioned, this is the result of a strategy chosen deliberately by Deng Xiaoping in the mid-1980s to develop a large, poor country.
13“(…) there are increasing signs that the [Chinese] economy has proceeded too far into manufacturing for export markets, to the point that the Chinese capital stock is misallocated: too much in manufacturing, too little in the domestic service industries – in particular the provision of health services” (Blanchard and Giavazzi 2005: 2).
14 Here I understand “sustainability” as follows: a development policy is sustainable if the adopted growth path (or policy strategy or development strategy) can be maintained for a long time without the overall social sys- tem collapsing.
(i) Stepwise development
The stepwise regional development has led to an increasing discrepancy of wealth and rising income inequality between eastern and western China. In 2015 the average per capita in- come of the western provinces was only 55% of that of the eastern provinces (NBS, own cal- culations). It is hard to believe that this rising discrepancy and inequality can be maintained forever (or for a much longer period of time) without risking the emergence of a political legitimation crisis.
(ii) Prioritization of economic growth
As emphasized above, the economic preferences dominate in the beginning and at early stages of development (according to Brecht’s statement: “Food comes first, then the mor- als”). In China this prioritization of economic growth in the 1980s, 1990s and still in the 2000s has been accompanied by a focus on carbon technology. This has steadily increased pollution within China, particularly in the industrial boom era. This pollution cannot be stopped easily, as the incentive mechanisms in China relevant to individuals, particularly firm bosses and local politicians, reward individual and regional growth-maximizing behavior and threaten punishments for reducing environmental pollution if it is accompanied by a de- crease in economic growth (failing to reach economic goals) in their companies or regions (see below in more detail).15 This also explains the current difficulties that China’s Central Government faces in achieving its goal to reduce pollution by cutting overcapacities. Recent reports by Xinhua press about the northern regions in China, where enterprises and local politicians have counteracted the official line of reducing pollution through cutting overca- pacities, appear to confirm such behavior in these regions.16, 17
(iii) Focus on exports and manufacturing
This economic growth-maximizing strategy during the 1990s and 2000s led to an excessively large share of the industrial sector and to overcapacities in the manufacturing sector. It again triggered a reduction of the market return from industrial investments and thus a de- cline in the sectoral and overall productivity. This is in line with the empirical literature, which finds a declining trend in TFP growth since the 1990s (see, e.g., Zheng et al. 2009, Wagner 2016).
15 “Such an incentive system can only make sense when a single objective – such as economic development – is seen as an overwhelming priority. This has been true of the Chinese leadership in the last few decades, and may reflect a broader social consensus” (Naughton 2017: 10). Correspondingly, Knight (2014) argues that China has been a “developmental state.”
16 See press article: http://news.xinhuanet.com/english/2017-02/20/c_136068637.htm.
17 These mainly economic incentive mechanisms for bureaucrats had already been initiated in the 1980s with formal “target responsibility systems” establishing targets (success indicators) for bureaucrats on all levels.
These targets were mostly economic (the most important was GDP growth and an increase in fiscal revenues;
see Whiting 2001 and Chan and Gao 2008). Today, however, “declines in local air pollution and reductions in local industry energy intensity are also statistically significant correlates of promotion chances, especially in relatively richer cities on the east coast” (Zheng et al. 2014).
Moreover, it led to high sensitivity of the Chinese economy (and its utilization rate) to a de- cline in demand exports, which became painfully apparent after the global financial crisis.
(iv) Political decentralization
The opening up of the economy in China entailed opening up not only to Western products but also to Western ideas and tastes. Particularly the latter were feared by Chinese politi- cians to lead to political (and cultural) instability;18 therefore, they tried to stop this import during the Xi era, when there was a reversal towards more (central) control, as I shall explain in Section 3 below.
The theoretical background of this issue is that there is a long-run trade-off or even an im- balance between developing and stabilizing an emerging market country. On the one hand, political stability needs economic growth and convergence. On the other hand, sustainable growth and development (convergence) need stability, whereas short-term growth and de- velopment (convergence) can be attained even with increasing imbalances; actually, they can even be hastened for a while by neglecting imbalances (see the above-discussed argu- ments). Hence, it is an art for the politicians to balance the two policy goals in a uniform concept. If stability is neglected or endangered for too long, there will be negative spillbacks to the development capacity (growth dynamics) of the economic system as a whole. This is explained in more detail in the argumentation outlined in the Appendix.
2.3 Was it really unsustainable?
Nevertheless, although the hypothesis about the unsustainability of the Deng strategy was argumentatively well founded, it was not empirically tested. Thus, it remains uncertain whether the Deng strategy, if it had continued (i.e. the counterfactual), would have really failed or not (it was stopped before the unsustainability hypothesis was proved and before the country fell into an MIT). As such, it can be argued that the Chinese Government fol- lowed a risk-averse (robust-control-type) risk management strategy, not a benign neglect attitude, and that the Xi Government “bought” the interpretation of ever-increasing imbal- ances from Western scholars and therefore changed the Chinese development strategy from 2012 onwards.19
Furthermore, the Deng strategy was consciously built on an unbalanced development strat- egy (see Hirshman 1958) to speed up economic growth and catching up. This was accompa- nied by social and economic imbalances over time, which ultimately have to be corrected (“rebalanced”) in a painful way (to avoid, but also with the danger of producing, a political
18 Such ideas and preferences can be regarded as already being incorporated into the traded products and information channels (according to a similar interpretation in growth theory of a major triggering factor of economic growth, whereby knowledge is incorporated into the traded products and hence knowledge spillo- vers occur, leading to faster convergence; see above).
19 However, it has to be taken into account that this change was also, to a certain extent, driven by the after effect of the global financial crisis to reduce the sensitivity of the Chinese economy to exports.
legitimation crisis; this is worked out by Wagner 2016 in more detail20). The existence of these imbalances produced pressure to change the Deng strategy.
In defense of the strategy change in China, one can point to the fact that structural change patterns in other emerging countries have shown that after a while the negative side effects of continuing industrialization become larger and hence deindustrialization is efficient or even required (this is worked out by Wagner 2013 in more detail).
By following the old growth strategy further, not only the economic system but also the po- litical system would have become unsustainable. This was the motivation of the already- mentioned reversal of the Xi strategy with a return to a greater focus on central control (and thus on stability instead of further maximizing economic growth; see below).
All in all, it can be argued that the unsustainability critique of the Deng strategy was theoret- ically well founded. Nonetheless, it is not proven or provable that China really would have run into major problems (for example, facing an MIT by continuing to follow the Deng strat- egy), as it was stopped early. Neither can it be proven that the problems created by a con- tinuation of the Deng strategy would have been greater than the problems triggered by a continuation of the Xi strategy.
3 The Xi strategy
The period of the Deng strategy is sometimes called the “first transition” (1978–2011), whereas the new Xi strategy period is called the “second transition” (2012/13ff.). In 1978–
1991 a reform of the planned economy was initiated; in 1992–2000 the term “socialist mar- ket economy” was coined; and afterwards the “Go West” strategy was developed. Typical slogans for the concepts of reforms associated with the first strategy period were Opening Up for the period 1978–2000 and Going Global for the period 2001/02–2011.
In contrast, a major slogan for the second (Xi) strategy period (2012/13ff.) is “One Belt, One Road.” Other new slogans associated with the second strategy are: “Made in China 2025,”
“Supply Side Economics” and “Chinese Dreams.”21
While the first (Deng) strategy followed an investment-led growth path, the second (Xi) strategy is planned to follow an innovation-led growth path. A major plan to implement this innovation-led growth path is the so-called “Made in China 2025” initiative. This initiative aims to restructure the whole of Chinese manufacturing by 2025. Thereby, China intends to
20 In a nutshell, the structural rebalancing process is associated with significantly declining growth rates. If the growth rate drops below a so-called “political legitimation line,” this may cause civil/political unrest. As the Chinese population is used to very high GDP growth rates and thus may have even higher expectations of fu- ture growth performance than other countries, Chinese politicians might prefer to delay the rebalancing re- forms.
21 For such a characterization of the development stages in China, see for example Fischer (2016).
be in the mid-range by 2035 and a world leader in manufacturing by 2049, the hundredth anniversary of the founding of the People’s Republic.
3.1 Characterization of the Xi strategy
What I call the Xi strategy is the strategy of “rebalancing” that started with the rise to power of Xi Jinping in 2012, first announced in the 12th Five-Year Plan of the Chinese Government in 2011.
This strategy of rebalancing focuses on the whole system; that is, it is characterized by (i) the attempt to include/integrate the western regions of China into China’s development strate- gy; (ii) the emphasis on improving the social and ecological standards within China; (iii) re- balancing the economy towards a consumption- and service-led growth path; and (iv) the attempt to (re)stabilize the society by re-authorizing the political system (refocusing on cen- tral control) and by trying to reject Western values.
(i) Integration of China’s western regions
The attempt to include the western regions in the development strategy aims to reduce the welfare differences between the eastern and the western regions in China.
Figure 1 depicts the annual salary of employed persons in the three different Chinese re- gions, namely the western, middle and eastern regions. Since the beginning of the 2000s, there has been an increasing income gap between the eastern region and the middle and western regions. In addition, the gap between the provinces with the highest and the lowest average real wage has increased, especially for the eastern region (see also Wagner 2015).
Figure 1 Income inequality between (and within) the eastern, middle and western regions
4000 14000 24000 34000 44000 54000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 HI-Eastern Zone
LI-Eastern Zone HI-Middle Zone LI-Middle Zone HI-Western Zone LI-Western Zone
Data Source: NBS (per capita disposable income in urban households, current prices). Note:
“HI” (“LI”) stands for “high income” (“low income”).
For the Deng strategy period, I have already highlighted the positive role of the establish- ment of special economic zones and single cities chosen as special areas for economic exper- imentation. These special zones and cities/areas for economic experimentation should now be extended step by step towards other western areas in China to reduce the economic and social discrepancies between the eastern and the western parts of China.
(ii) Improving social and ecological standards
The emphasis on improving the social and economic standards in China intends to fill the
“social gaps,” which have increased in China during the past decades.
a) Insurance coverage
Although China has improved significantly since the beginnings of the 2000s with respect to the insurance coverage (as depicted by Figure 2), there is still room for improvement, partic- ularly if compared with some developed countries, such as Germany.22
Figure 2 Social insurance coverage (percentage of employed population)
Data Source: NBS.
22 In the same vein, the Quarterly Forecast and Analysis report of the Center for Macroeconomic Research, Xiamen University (2015), states that the “total amount of social security, medical, and educational expendi- ture in public fiscal expenditure gradually rose from 29.5% in 2010 to 31.7% in 2014.” However, this is still small compared with the performance of the Western economies: for example, in “2011, EU-27’s spending on health, education, and social protection together accounted for 47.8% of the central (federal) government spending”
and in “2013, the US social security, Medicare, and Medicaid spending accounted for 48% of federal fiscal ex- penditure” (Center for Macroeconomic Research of Xiamen University 2015: 57).
0 5 10 15 20 25 30 35 40 45 50
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
unemployment insurance basic medical care insurance work injury insurance maternity insurance Basic pension insurance
b) Environmental pollution
Fighting the huge amount of environmental pollution in industrial areas as well as in big cit- ies is another challenge to be mastered in China over the coming years and decades. See Figure 3.
Figure 3 Environmental pollution in China (PM2.5, mean annual exposure, mcg/m²)
Data Source: World Bank (2017).
All in all, as Naughton (2017: 18) emphasizes, recently “China has taken real and meaningful steps toward re-establishing at least a rudimentary welfare system that covers its entire population.” “However, average payments are very low” (Naughton 2017: 17). Nonetheless, the “Xi Jinping administration has since 2012 reduced the focus put on economic growth in official success indicators, squeezing in new indicators such as managing local government debt, reducing poverty, and improving the environment (New Capital Post 2014; Wei 2016)”
(Naughton 2017: 14). Therefore, “the bureaucratic incentive system becomes less single- minded” (Naughton 2017: 14). In other words, “(t)he objective of China’s state intervention has clearly shifted from growth at any price to a more complex set of goals that includes redistribution and social economic security” (Naughton 2017: 21).
(iii) Rebalancing
In the 13th Five-Year Plan, the Chinese Government underlined the importance of reducing the imbalances built up during the previous industrialization period (see, e.g., Wagner 2016).
In the following I will briefly evaluate China’s attempt to achieve this goal since then.
Table 2 depicts some of the important imbalance indicators already mentioned (cf. Section 2.2), namely the investment and savings rates, household consumption expenditures and CPI (corruption) index (note that a higher CPI index indicates a lower level of corruption). In par- ticular, it is claimed that China’s investment and savings rates are too high, whereas the do-
30 35 40 45 50 55 60 65
1990 1995 2000 2005 2010 2011 2012 2013 2014 2015
China World
mestic consumption is too low. In addition, China has a relatively high level of corruption (compared with the developed countries).
Table 2 Imbalance indicators in China
Gross fixed capi- tal formation (percentage of
GDP)
Gross savings (percentage of
GDP)
Household con- sumption final expenditure (percentage of
GDP)
CPI index
2010 44.99 51.5 35.92 0.55
2011 44.89 49.47 36.75 0.57
2012 45.27 49.75 36.63 0.61
2013 45.51 48.93 36.63 0.63
2014 45.04 49.66 37.16 0.56
2015 44.05 48.67 37 0.58
2016 - - - 0.62
Data Source: World Bank (2017) and Transparency International.
As shown in Table 2, China reduced its savings rate by 2.83 percentage points between 2010 and 2015, whereas the household consumption expenditures slightly increased by more than 1 percentage point. The improvements regarding the too-high savings rate are only modest, and it even increased between 2012 and 2013. However, since then there has been a decreasing tendency. In addition, the CPI index improved during the 2010–2016 period (besides the deterioration in 2014).
Regarding overcapacities, another major imbalance of the Chinese economy,23 the picture looks less optimistic. In particular, the overcapacities in all the major industry sectors depict- ed in Table 3 increased sharply between 2008 and 2014. Recent newspaper articles claim that in 2015/2016 as well China was unable to improve its overcapacity problem; however, at least there seem to have been no further increases.24
Table 3 Scale of overcapacity (in million tons)
2008 2014 Increase (in %)
Steel 132 327 247.73
Electrolytic aluminum 4.9 9.2 187.76
Cement 450 850 188.89
Refining 77 230 298.70
Flat glass 76 215 282.89
Paper and paperboard 9 21 233.33
Data Source: European Union Chamber of Commerce in China (2016).
23 For an extensive overview of the various overcapacities in China, see Wagner (2015, 2016).
24 See for example https://global.handelsblatt.com/companies-markets/studies-chinese-steel-overcapacity- hardly-changed-in-2016-703021.
(iv) Refocus on central control
Over the last three decades, the Chinese Communist Party has struggled against the threat of “bourgeois liberalization” and uncontrolled evolution. It is said (Economist 2016) that, over the past couple of years, President Xi Jinping has been involved in a war against “histor- ical nihilism.”25 In party jargon historical nihilism means denying the “inevitability” of China’s march towards socialism.26 Hence, an attempt to regain control in today’s China can be seen here.
Thereby, the Chinese Government intends to avoid the destabilization of the political sys- tem, to be understood as a loss of power by the Chinese Communist Party. The change or rebalancing process within the Xi strategy is not only economically but also politically orient- ed. One year after Xi Jinping’s rise to power, the Chinese Communist Party implemented the
”Decision on Some Major Issues Concerning Comprehensively Deepening the Reform” on November 12, 2013. This document includes a wide-reaching reform program with the in- tent to enhance the quality and efficiency of governance at all levels of the party.27 More importantly, it marks a massive step toward recentralized governing and rehierarchization, reasserting top-down political steering and installing new instruments for political and social control in areas like anti-corruption campaign work, social management, ideological mobili- zation and internet control.28 Using “big data” as the main vehicle, a nationwide system of comprehensive data evaluation will be developed to monitor the misconduct of individuals, particularly of entrepreneurs (and of local politicians), by computers and then punish them by the fastest means.This apparently stands in contrast to the prior Deng strategy of a de- centralized, experimental approach to reforms.
25 Online, available at: http://www.economist.com/news/china/21709321-battle-raging-realm-historiography- china-struggling-keep-control-over-its.
26 The term came into vogue after the crushing of the Tiananmen Square protests in 1989. Party leader Jiang Zemin then declared that historical nihilism threatened to “seriously erode” the party. Jiang’s main concern then was a television broadcast called “River Energy,” which pictured China as a country burdened by a long history of backwardness and inward-looking conservatism. Today, Xi Jinping regards similar critical statements, for example descriptions of the horrors of the Cultural Revolution, as a challenge to the legitimacy of the party rule. (To counter this challenge, his predecessor, President Hu Jintao, had already reintroduced Confucian ele- ments (“harmony”) into the Chinese policy culture in 2003.)
27 To implement this new approach of top-down steering, a new organizational mechanism in the form of a hierarchy of “Leadership Small Groups for Comprehensively Deepening Reform” has been adopted, with direct and comprehensive powers of top-down enforcement.
28 This is in line with the naming of Xi Jinping by the Central Committee of the Chinese Communist Party in October 2016 as the “core of the party’s leadership.” This meant the concentration of power in the hands of the party chairman, which has not been the case since Mao Zedong. Under Xi Jinping’s predecessor Hu Jintao, the principle of a collective party leadership was still preferred.
3.2 Will the Xi strategy be sustainable and under which conditions?
3.2.1 Doubts about the sustainability
It is uncertain whether the Xi strategy is or will be sustainable. The probability of falling into an MIT may be even higher under the Xi strategy than under the Deng strategy. To explain this, I again follow the above-chosen structuring characteristics of the Xi strategy.
(i) Integration of China’s western regions
Integrating the western parts of China into its current modernization process will be all but easy. It may be possible to develop China’s west toward the level that the east had reached one decade ago (being part of the “manufacturing workbench for the world,” producing (low-skill) intermediate goods for advanced countries). However, integrating China’s western regions into the current modernization process targeted in the “Made in China 2025” pro- gram will not be possible, at least not in the short to medium term. The goal of upgrading the manufacturing sector and developing an innovation-based industry is beyond the reach of the western regions of China due to the weaker level of education and the human capital shortage. Moreover, the readiness of educated, well-trained workers from the east (includ- ing former migrants from the west) to move (back) to the west to help in developing China’s western regions is reported to be very limited.
(ii) Improving social and ecological standards
Improving social standards requires the building up of a social welfare system. This not only takes quite a while but will also be very costly. It will aggravate the structural shift of labor from more productive manufacturing to less productive service sector jobs, thus reducing the overall productivity and hence the economic growth in China (see Wagner 2013).
Improving ecological standards, however necessary this may be, is obviously difficult to im- plement. As the official press agency of China, Xinhua, recently reported, there are signifi- cant setbacks with regard to the attempt to reduce pollution in the old industrial regions, as many companies and local authorities there ignore the orders from the central government to cut back production processes with high levels of environmental pollution. The reasons are obvious and based on wrong incentives offered to local companies and authorities (see below in more detail).
(iii) Rebalancing
A shift toward services (tertiarization) will be accompanied by a significant decrease in productivity and hence in economic growth (the more that the government aims to increase the low-productivity parts of the service sector, like social or welfare services; see Wagner 2013, 2015; Murach and Wagner 2017). The question is whether the central and local gov- ernments will accept this or, as during the past few years, will further counteract the de- crease in economic growth by implementing or triggering macroeconomic stimulus pro-
grams financed by credit expansion, which, however, may unintentionally further decrease the productivity growth (see Wagner 2016).
(iv) Refocus on central control
Recentralization itself is costly, as it may cause the economic development to deteriorate by threatening to paralyze the drivers of innovation and by increasing bureaucracy and regula- tions, thus decreasing the economic efficiency and increasing the macroeconomic costs of political governance.29 The change toward recentralization may be detrimental, particularly if Deng’s way of creating opportunities for investors in China to experiment under market rules, realize economic incentives and unfurl technologies is slowed down.
All in all, the costs associated with overall rebalancing will be high, and these costs will hit influential interest groups in the industry sector particularly hard, thus causing much re- sistance and pressure on the Government and hence slowing the reform process.
Therefore, the Xi strategy will only be successful if policies and institutions (including incen- tive mechanisms) are sufficiently reformed so that the reform process has a chance to be implemented quickly and the innovation-led growth strategy can be realized successfully.
What is argued for here is: a) upgrading of the financial system, b) investor protection, c) easing the market entry for foreign competitors, d) a decline in corruption, e) better institu- tions and f) political competition.30 Particularly, better institutions are mostly relevant due to the devastating results that China experienced in the recent World Government Indicator ratings (see Wagner 2015).
Another major problem is that, due to short-term political interests, politicians tend to favor a return to the investment-led strategy (to avoid the high costs of structural reforms). For example, as many examples from all over the world show,31 eliminating overcapacities is difficult, as influential interest groups in the respective enterprises or branches are severely affected by such reforms and hence will lobby to block them or water them down.
Here I have to take into account (as already briefly mentioned) China’s establishment of wrong incentive mechanisms for local politicians and authorities. Local authorities in China have an incentive to keep even ailing companies alive, as their business tax revenues are calculated not from the profits but from the production value. However, the Central Gov- ernment in Beijing also has an incentive to delay the elimination of excess capacities to pre- vent a corrective recession and the resulting social unrest.32
A driving force of disequilibria (and of preventing reforms) in the form of an increase in in- vestments, for example in construction stimulus programs, is also the fiscal dependency of
29 See, however, Mohr and Wagner (2013) for an analysis of the beneficial role of regulatory governance.
30 These suggestions are made in other publications as well (see, e.g., Hasan et al. 2009; Söderlund and Tingvall 2016, Zhang et al. 2016, Zilibotti 2016).
31 See for example the experiences of European Union countries or regions with “old-type” industries; in Ger- many these are, in particular, North-Rhine Westfalia and some East German federal states.
32 Therefore, as a substitute, it often favors the initiation of new macroeconomic stimulus programs.
the local authorities on land sales. The land formally belongs to the Government in China;
however, it is expensively leased to building contractors. The income from this source consti- tutes the most important part of the total income of a local government. About 40% of the total income generated by cities comes from land sales (see Shepard and Wade 2015: 32).
Furthermore, local politicians often try to protect incumbents, thus regarding foreign com- petition as a threat (forcing foreign competitors into joint ventures and into the use of breaching/corruption, at least in early stages of reforms) (see, e.g., Davies 2013). This in turn delays rebalancing reforms.
Therefore, and to soften the costs of rebalancing reforms, the Xi strategy (with a stronger focus on stability) has so far often chosen a Keynesian-type expansionary monetary and fis- cal policy to counteract the negative growth effects of “rebalancing,” that is, to avoid eco- nomic adjustment recessions and thus social unrest. However, consequently, it has actually built up ever-widening imbalances (see Wagner 2016).33
3.2.2 The danger of becoming stuck in an MIT
There is a real danger for the Xi strategy of becoming stuck in an MIT. The reason is that the imbalances are still very high or even higher than at the beginning of the rebalancing pro- gram. Examples of this are the extent of overcapacities and ghost cities and the increase in debt and in house prices (see, e.g., IMF 2016).
Corporate debt increased from 130.3% in the last quarter of 2012 to 167.6% in the second quarter of 2016. House prices (yearly changes) have experienced strong fluctuations since the last quarter of 2013, exceeding the critical +/-6% threshold suggested by Bondt et al.
(2011).
The following question arises: what does “unsustainable” mean? A growth strategy that is unsustainable leads to an MIT or (for an upper-middle- or lower-high-income country) to a
“high-income trap” (HIT). Conversely, if a country has fallen into an MIT or HIT, one can con- clude that its growth strategy was unsustainable. (However, I have to take into account the necessity of filtering out the effects of special factors that can have finished otherwise sus- tainable development.)
The question here is which strategy is associated with a higher probability of slipping into an MIT, the Deng or the Xi strategy?
The reforms in the Xi Jinping era are lagging behind the original plans and goals, particularly the plans to reduce loss-making state-owned enterprises. On the contrary, currently there
33 This does not, however, imply that the Chinese Government has so far not tried hard to implement the in- tended rebalancing process and to eliminate imbalances. Nonetheless, the institutional hurdles have been (too) high (and underestimated) and the incentive mechanisms often ineffective or wrong to implement the reform process successfully in this giant country with significant regional diversity.
are many complaints (by European companies active in China, for example) that state- owned enterprises are systematically being strengthened in many branches and that the state is claiming an ever-greater role for itself (see, e.g., European Chamber 2016). The IMF also complains in its recent country report that China has hardly made any progress with its reforms, particularly concerning the ineffective state-owned enterprises.34
In general, it can be stated (as briefly mentioned above) that there is a trade-off between a) development and b) stability (the two main political targets), which a government has to take into account (in China and elsewhere).35
a) Development (to be successful over time) requires, on the one hand, from time to time, quick implementation of structural reforms or change (which is a painful process and requires patience, as many people have to suffer J-curve transition costs during structural change), and in later stages “subsidiarity,” that is, a certain degree of privatization, liberalization, deregulation and incentive mechanisms.
Both, however, may overburden many developing and emerging market econo- mies, particularly when conflictual, impatient attitudes or interest groups domi- nate and/or there are free or open capital markets (like in the Asian crisis 1997/8;
see, e.g.,Berger and Wagner 2000) facilitating or fueling an increase in macroe- conomic instability and fluctuations. On the other hand, sustainable development is not imaginable without stability. Therefore, governments also have to take care to stabilize an economy and society. Too strong a focus on stabilization, however, can slow or even stop the development and convergence process, as I will argue in b).
b) Stability is a requirement for ensuring sustainable development and avoiding le- gitimation crises (Wagner 2016). However, in the case of China, placing more emphasis on stability threatens to favor the conservation of the investment-led strategy (by delaying structural reforms and hindering the change to an innova- tion-led strategy).
This has recently been experienced widely in China despite the official an-
nouncement of the need for rebalancing, as already mentioned. The implementa- tion of rebalancing is associated with high transitory costs (common to all big structural reforms), so powerful interest groups/associations (representing the interests of the “old elites” or old industries) try to avoid transition costs that are
34 Investments by private investors halved in the first half-year of 2016, whereas investments by state-owned enterprises doubled within the same period of time. In addition, there have been warnings of a banking or financial crisis in China, for example by the Bank of International Settlements in a recent Quarterly Paper (BIS 2016) as well as by the IMF in its recent country report (IMF 2016).
35As argued above, there has been a shift towards the stability goal under Xi Jinping (based on recentralization to gain control over the system).
too high by fighting rebalancing reforms.36 Therefore, the reforms are at best de- layed if not prevented.
On the political side, stability requires control (and this conserves or fosters non- democratic, authoritarian systems). Too much control, however, may hinder fur- ther strong growth dynamics and fast development as it hinders experimentation, new creative thinking and acting, and hence technological advancement.
It may suffice to hinder economic development if governments only impede sin- gle subsystems from developing in the same way as others are allowed to devel- op (for example, if experimentation is allowed in the economic system but not in the political and socio-cultural systems). This alone can imply unbalanced devel- opment, leading to imbalances and bottlenecks.37 The history of China shows the effect that too much control and isolation can have; just think of China’s major set-back from having been the world’s leader in technology to becoming one of the poorest, least-developed countries in the world during and after the nine- teenth century, when China missed the new economic dynamism of the Industrial Revolution and of globalization. That is not to say that a certain degree of stability and control is not a necessity: it is, particularly in such a giant country as China.
Hence, the political reversal in the Xi strategy was probably a good choice locally.
However, the danger of overdoing it and destroying the economic dynamism built up during the Deng strategy era is not negligible.
3.2.3 Under which conditions can China avoid an MIT?
Further questions concern whether China is already in (or even beyond) the middle-income range (MIR) and whether it is able to avoid becoming stuck in (or falling back into) an MIT.
These questions are still unresolved (see Glawe and Wagner 2016b).38 Depending on which database and MIT definition are used, various cases (China is in an MIT, China has avoided an
36 Or, respectively, against the specific reform options that put high costs on them; instead they may favor reform alternatives that put relatively higher transition costs on others (Alesina and Drazen 1991).
37 If the political–socio-cultural system is not allowed to develop as fast as the economic system, a demand for political and cultural changes or experiments and hence social protests and unrest may not arise as extensively and rapidly as otherwise; however, such unbalanced development will lead to ecological, regional and other inequalities or imbalances, as the example of modern China shows. On the other hand, if the socio-cultural system is also allowed to develop or change as fast as the economic system, then the danger of political desta- bilization (a call for democracy, co-determination, transparency and decentralization) may occur. This, howev- er, can lead to global instability in a country as immense as China. The Xi strategy can be seen as an answer to this threat.
38 The welfare convergence attained by China is even lower if I measure welfare not only by GDP per capita but also by other measures, such as consumption, leisure, mortality and inequality, as Jones and Klenow (2016) show.
MIT, China will experience an MIT and China will not be caught in an MIT) are supported by the evidence (Glawe and Wagner 2016b).39
There are conditions (political and institutional reforms) that need to be implemented so that the Xi strategy can simultaneously generate stability and convergence/development as well and thus become sustainable. However, I have already briefly listed some of these con- ditions above (see also Wagner 2015, 2016), so I will not repeat them.
4 Growth-theoretic systematization of the arguments
In this short section I want to systematize the above arguments from a growth-theoretic viewpoint to highlight the major drivers behind the recent growth slowdown in China and the possible key levers for keeping the growth reduction moderate.
In a developing country (like China in the 1980s and 1990s), the supply-side-driven potential output is mainly dependent on input accumulation and relative prices. I here use a Cobb- Douglas production function:
(I) 𝑌 = 𝐾𝑎𝑁1−𝑎, where 𝑌 denotes output, 𝐾 capital, and 𝑁 labor; indices “𝑎” and
”(1 − 𝑎)”stand for production elasticity of 𝐾 and 𝑁, respectively.
Potential growth is then given by (II) 𝑌̂ = 𝑎𝐾̂ + (1 − 𝑎)𝑁̂.
In China, the growth dynamics during the 1980s and 1990s (partly also the 2000s) was on the one hand fostered by the strategy of neglecting the development of the western Chinese regions so that a huge migration flow from the west to the east of China emerged that helped to increase the growth dynamics in the east (by increasing 𝑁̂ in the east of China).40 On the other hand, capital accumulation (𝐾̂) was fostered by the Government’s decision to favor the industry sector, by increasing the infrastructure and integrating China’s industry sector as a workbench into the world production (globalization), and pushing domestic banks to extend credit expansion to domestic investors from the industry sector.
Moreover, China’s Government has kept wages and capital prices artificially low by fixing the wage income at a low level and by subsidizing capital (through reducing the price of capital and of credit), which is relatively easy in a planned system, but not in a market economy without state intervention in price setting. By keeping the wage income low, China managed to realize high forced saving as a precondition for financing high capital accumulation. In
39 In particular, many different definitions of the MIR exist; furthermore, the GDP (per capita) data differ signifi- cantly across databases (as well as across different versions of databases); see Glawe and Wagner (2016a, b).
This can have significant impacts on the MIT results.
40 In addition, the migrant work-force could be employed more productively in the east than it was possible in the west of China.
addition, by subsidizing capital, it reduced the capital costs of investors and thus (together with forced low wages) costs in general so that products produced in China became and stayed attractive to foreign direct investors and importers of intermediate and end products.
Thereby, export incomes could be kept high and thus foreign assets could also be accumu- lated steadily and used to keep the exchange rate stable (i.e. to avoid a currency apprecia- tion which would have damaged the export incomes).
In the following I show that – by subsidizing capital and keeping real wage increases low (be- low labor productivity growth) – the Chinese Government could foster capital accumulation.
For example, if I assume that by reducing 𝑟 (subsidizing capital costs) the government could raise 𝐾 (foster capital accumulation),41 and assume that capital investors (including state enterprises) maximize real profit or surplus:
(III) 𝑚𝑎𝑥 𝑌̃ − 𝑟𝐾̃ − 𝑤𝑁̃, where 𝑟 is real interest rate and 𝑤 is real wage, and 𝑌̃, 𝐾̃, 𝑁̃ stand for output, capital and labor input of the individual investor,
then I get (as the solution of this maximization problem):
𝐾̃∗ = (𝑎𝑁̃𝑟1−𝑎)1−𝑎1
Furthermore, we know that (in a closed economy) aggregate income is capital income plus labor income:
(IV) 𝑌 = Π + 𝑄, with Π = 𝑟𝑘 and 𝑄 = 𝑤𝑁 Hence 1 = Π 𝑌⁄ + 𝑄 𝑌⁄ = 𝜋 + 𝜃
By keeping wages or real wage income low (so that 𝑄̂ < 𝑌̂ and hence 𝜃̂ < 0), the profit or surplus share (e.g. of the state enterprises) 𝜋 could be raised so that therefrom more capital accumulation could be financed. In this way, the Chinese government could foster and raise capital accumulation.
However, after two (and a half) decades, the flow of migrants began to slow down, and the attempts to reduce this tendency by implementing institutional reforms like the softening of the hukou regulations occurred late and hesitantly. Thus, one of the growth determinants, namely 𝑁̂, started to fall (particularly for the booming east of China). Additionally, and, more importantly, the negative externalities of the industrialization process (of extensive capital accumulation and hence the relatively high investment share) began to become apparent (environmental pollution, asset-price-booms and busts, etc.). Hence, the other growth de- terminant, namely capital accumulation 𝐾̂, also had to be slowed down, and herewith 𝑌̂
also to fall. Moreover, wages in the manufacturing sector have risen substantially over the last decade (due to shortage particularly of well-educated workers)
41 A basic assumption in neoclassical production (and growth) theory is that the factor inputs are substituted when relative prices change; that is, 𝐾/𝑁 = 𝑓(𝑟/𝑤) with 𝑑𝑓/𝑑(. ) < 0.
This process of growth slowdown can only be stopped or reduced by implementing technical progress which is implied in the following extended output production function:
(V) 𝑌̂ = 𝑏𝐴̂ + 𝑎𝐾̂ + (1 − 𝑎 − 𝑏)𝑁̂.
By increasing 𝐴 (𝐴̂ ), 𝑌 (𝑌̂ ) can be increased. The potential of the state to encourage techno- logical progress, however, is limited. What the government can do is to subsidize the price (cost) of producing innovations (where 𝐴̂ = 𝑓(𝑃𝐴) with 𝑃𝐴= innovation costs, and 𝑓’ < 0).
However, in general it is difficult for a government to directly spur or “order” innovations (except from indirect ways, for example attracting foreign direct investments). Creating the right incentives or institutional reforms to encourage innovations is all but easy. This is ap- parent in the current attempt of the Chinese Government to implement the “Made in China 2025” initiative. Insofar continuing the fast convergence process in the next decades will be much more difficult than it was to initiate it during the first three decades after 1978. It is not impossible; however, it is dependent on the right structural incentives being set by the Government to encourage (in particular) creative thinking and acting within China.
However, growth dynamics depends not only on encouraging technical progress, but also the method of managing the reduction in the negative externalities created and accumulat- ed previously by the old growth strategy of the Deng era. The influence of this management on the growth dynamics is reflected in the Appendix of this paper.
5 What can China learn from other successful countries?
In this section I ask what China can learn from successful countries like South Korea to avoid an MIT and hence implement a successful development strategy. Here I can refer to the his- torical experience (see also Appendix B below) that only developing (emerging market) countries that initiated the necessary structural reforms in good time avoided being caught in a development (middle-income) trap.
The theoretical approach sketchily outlined in Appendix B suggests that development can best be explained as a stepwise process and structural change as a sequential, step-by-step (nonlinear) reform process.
If a growth strategy reaches its stability limits, it has to be replaced by a new strategy in time; otherwise, the system might explode (in the sense of becoming unstable and non- sustainable), because it exceeds the economic and political stability thresholds (Wagner 2016). In contrast, a timely transition to a new growth strategy can restore stability and thus sustainability, albeit usually at the expense of a transitory lower growth rate.
The latter can explain the successful development of an emerging market economy into a developed country. In contrast, countries that fell into an MIT can be interpreted as having not managed to adjust their growth strategies in a timely manner.42
Conversely, this means that the few successful East Asian countries (like South Korea and Japan) that have been able to avoid or overcome an MIT have obviously implemented the necessary structural changes and reforms and installed a new growth strategy on time (be- fore system-destabilizing crises could develop in these countries). I illustrate this in another paper with the example of South Korea, which may serve as a learning experience for Chi- na.43
However, it can hardly be expected that China, even if it follows the experience of South Korea and avoids/overcomes an MIT, can experience the same high growth rates during the coming few years as Korea did during its equivalent development stage. The reason is the worse frame conditions currently confronting China. These worse frame conditions appear on two sides:
Supply side
a) There are huge overcapacities due to the after effects of the global financial crisis (the global economy has not yet fully recovered), and the global demand for inter- mediate products is still low; these effects, however, should be transitory.
b) Ageing: 𝑁̂ will decline (China will age rapidly in the coming decades); in 1985, when South Korea had a similar GDP per capita to China’s current one, the former al- ready recorded an age dependency ratio of 52.4%. In 2016 China’s age dependency ratio stood at 36.6% (World Bank 2017); this ageing effect in China is permanent or medium to long term and increasing.
Demand side
a) Secular stagnation (low/negative natural rate of interest) is often expected to be- come a general phenomenon in the coming years; if the stagnation is really “secular,”
as argued by Summers and others (cf. Summers 2014), the effect will be permanent or long term.
b) Urbanization in China is expected to increase from 50% to 80% during the coming decades; there is a need for housing and need for green technology; the effect will be medium to long term.
42This means that, if the economic imbalances are not reduced in good time, if pollution is not reduced before it becomes explosive, if social imbalances are neglected for too long (such as before the Trump election in the US) and if structural–normative values are changed too rapidly, then a development/growth strategy will gen- erate problems or, respectively, become unsustainable.
43 See Murach and Wagner (2017) and Kim, Park, Murach and Wagner (2017, work in progress).
